Wednesday, 13 March 2013

Timing the Market

Investing is easy - you buy a share, wait for it to go up and then sell it. If it doesn’t go up, don’t buy it - simples!

Markets go up and down - surely it should be possible to buy low and sell high - wait for the markets to fall again and repeat. Sounds good in theory but in my experience, its impossible to achieve in practice.

Of course, with the stockmarket on a roll this year, there will be plenty of financial pundits holding forth with their pearls of wisdom on where the markets are heading and sowing the seeds of doubt - the truth is, there are only two types who try to forecast the future direction of the market - those who don’t know, and those who don’t know they don’t know. My advice, for what its worth is to ignore the pundits and forecasters.

Warren Buffett knew there was a market bubble developing during the dotcom boom of the late 1990s but he could not profit from this knowledge as he could not tell when the boom would turn to bust.

I was recently reading some research on timing by Professor Malkiel, a long-time friend of Vanguard founder John Bogle. The tenth edition (revised) of his best-known book, "A Random Walk Down Wall St", was  published last year (Jan 2012) - and since its first edition has sold over one and half million copies.

As investors, it's all too easy for our emotions to get the best of us, warns Prof Malkiel.  Professional investors are just as likely as retail investors to get it wrong, he insists.

Over the 15 years from 1995 to 2010, investors who stayed fully invested secured an annual return of 8.05%, notes Prof Malkiel. Those who tried to time the markets, but missed the best 10 days in that 15 year period, achieved a return of only 3.15%. Those who missed the best 30 days achieved a negative return of -2.6%.

Drip Feed

If you agree it will be impossible to time the market by buying low and selling high - many small investors actually do just the opposite - what are the alternatives?

For me, the best strategy has been to drip feed new money into my equity investments on a regular basis - as a result I will be buying when the market is low or high and many points in between. Last May and June, I was buying investment trusts when the FTSE 100 had fallen below 5,000. I have just bought some shares in Aberdeen Asset Management when the FTSE 100 had just gone above 6,500 - a 30% rise in less than 12 months. 

When there are obvious market downturns, I may accelerate the buying or sell some existing fixed interest securities to take advantage of the higher yields available on equities. As a rough rule of thumb, if the markets (FTSE 100) are 15% below their peak of the previous 12 months, I will be looking to accelerate the buying - likewise if it is 20% above the low point of the previous year (like now), I will ease back a little and wait to see if the markets pull back. I’m really not sure whether this strategy has produced any better results than a constant monthly drip feed - possibly not - also, I’m not suggesting this as a strategy for others, merely outlining my own approach.

Of course, over the long term, the point at which you buy an investment should become less important, especially if you are reinvesting dividends to turbo-charge portfolio returns.

As ever, slow & steady steps…

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